Close encounters of the third kind – commonhold

29 July, 2020

Will the proposed changes to commonhold make it a viable “third estate” for structuring home ownership and mixed use developments?

We are all, to a greater or lesser degree, familiar with the concepts of freehold and leasehold ownership, but most people will be unaware of the existence of a third ownership structure known as commonhold.

Commonhold came into force 27 September 2004 and differs from traditional freehold ownership because it combines freehold ownership of a unit in a development with joint ownership of common parts.  Through membership of the commonhold association, the unit-holders will themselves own, and be responsible for, the common parts.

The rights and obligations of the unit-holders and the commonhold association are embodied in commonhold community statement.  Commonhold is actually a statutory animal and rather than being a new type of estate in land it is probably best described as a “type of freehold”.

Commonhold was introduced to address the perceived unfairness of the traditional leasehold for home owners (exemplified by high ground rents, lack of control for residents and decrease in value of a leasehold interest as the term reduces coupled with the costs of securing lease extensions) but was also intended to be capable of use for commercial premises.

Since its introduction, however, only around 20 commonhold associations have been created and many lenders are not willing to lend in respect of commonhold property.  In addition, the structure has not been regarded as fit for purpose for mixed use developments and has therefore languished.

The Government is keen to reinvigorate commonhold and the Law Commission’s proposals for doing so have just been published.  The 121 recommendations include measures intended to address some of the current failings in the original methodology, notably:

  • Lender confidence – changes to ensure effective enforcement of financial breaches of the commonhold community statement, the ability for lenders to apply to the First-tier Tribunal for professional directors where unit owners are not willing to serve and addressing concerns over the long term security of the commonhold association which could end as a result of insolvency or voluntarily if the unit holders vote to bring it to an end.
  • Enabling use for mixed use developments – the existing legislation does not allow sufficient flexibility for complex developments.
  • Creating an easier process for conversion from an existing leasehold structure – currently unanimous agreement of freeholder, leaseholders and lenders is required.

Whether the recommendations will be sufficient to address concerns and create a real sea-change in the structuring of home ownership and mixed-use developments will depend on the appetite for change amongst developers, lenders and the end users.

Recent, and continuing, bad publicity in respect of leasehold ownership may be sufficient, although commonhold cannot be regarded as a straightforward alternative.

Change comes slowly in the world of land law, but the Law Commission nevertheless hopes that we are now ready to come into line with other countries, such as Australia, Scotland and the US, where similar types of title have worked effectively and that the commonhold ownership structure will finally cease to be regarded as an alien life form.